Opinion, Berkeley Blogs

The free feedom: Why the end of "free checking" is good for consumers

By Chris Hoofnagle

Oh noes! The Wall Street Journal's Robin Sidel misreports the end of free checking:

Bank of America Corp. and other banks are preparing new fees on basic banking services as they try to replace revenue lost to regulatory rules, in a push that is expected to spell an end to free checking accounts for many Americans.

Free checking isn't dead. It never existed!

"Free" comes with hidden fees. And that's why the new rules ending "free checking" are good for consumers and competition. In the past decade, financial services innovation has focused upon creating new fees that are opaque to consumers. New regulations will require banks to more clearly state the costs of an account.

The recently regulatory shift is simply causing a reallocation of costs associated with checking. Instead of sticking consumers on the backend, banks will now have to stick them on the front end. And that's they key -- fees on the front end are subject to competitive pressure, back end penalty fees are obscure and consumers suffering from optimism bias falsely believe that they'll never experience them. Consumers will actually benefit from the certainty and fairness of ordinary fees rather than the gotcha model we've experienced over the past 10 years.